Everyday Low Prices: The Super Walmart Problem

Just a minute a go I posted on Virginia Postrel and the Hotel Room problem. There might be serious data issues but from a conceptual level it doesn’t seem that bad to me.

On the other hand the Super Walmart Problem is a big deal.

Here is the problem: Super Wal-Mart sells the “same” stuff as Harris Teeter but at a much lower price.

Classic price premium problem. We expect nicer amenities to be at the root. We walk into Harris Teeter and low-and-behold its nicer. Problem solved, our work is done here fellas.

Not so fast. A few years ago Super-Walmart didn’t exist and some of its customers were forced to shop at Harris Teeter for groceries. It would ludicrous not to include the expansion in low price choice. It would be like not account for the creation of the Iphone.

So Wal-Mart did lower inflation. How much?

Well maybe we can try to track home much Wal-Mart impacted the prices at Harris Teeter. So, before Harris Teeter had some sort of quasi monopoly. Wal-Mart broke that monopoly and offered more choice. Harris Teeter then must have responded to that. Maybe we can measure it?

Lets look.

Whoops!

Prices at Harris Teeter went up after the introduction of the Super Wal-Mart?

Why?

Because super Wal-Mart sucked away all the low income patrons. No need to worry about keeping prices low to attract them anymore. You aren’t going to beat Wal-Mart. You might as well raise prices.

That’s bad, but it gets worse my friends.

See in part the story of Harris Teeter is that Wal-Mart swept away the “elastic demanders” those who are sensitive to price. Allowing Harris Teeter to raise prices. However, we might be able to get a handle on what’s going on by looking at relative growth rates in sales.

Presumably Wal-Mart cost Harris Teeter sales and we might be able to back out some sort of cross-price elasticity of demand from that.

Here is the further problem. The very existence of Super Wal-Mart likely increased the amenity value of Harris Teeter.

Why?

Well lets be frank. One thing that Harris Teeter shopper dislike is shopping next to lower income people. We might not approve of these preferences but they are real. Super Wal-Mart drew away the poorer customers thus improving the shopping experience for those customers left at Harris Teeter.

Get a statistical handle on that problem.

All of this is to say that indexes are really, really hard and my sense is that the further we move towards a society that consumes amenities rather than tangible goods the worse the problem is going to get.

12 comments

Yes, Walmart helped INCREASE the utility of SIGNALS from Harris Tweeter in the local STATUS ECONOMY, therefore increasing the VALUE and PRICE of status signals in the local status economy.

The question for everyone is whether there is enough INEQUALITY of income (a wide enough distribution) to support the existence of a SIGNALING ECONOMY consisting of consumer goods that increase CONSUMPTION or whether people will revert to some OTHER form of signaling rather than the use of consumer goods.

I suppose I ought to just take up graphing these things in the IS-LM format the way Roger Garrison took up graphing the austrian cycle just to make it easier for rather slow Macro folks to understand. And it would undermine the entire edifice, which conveniently for statists, extols the virtue of Monetary policy and the search for equality in Democratic Socialist Secular Humanism, by illustrating that it directly competes with Freedom and Prosperity over the long term.

Status is just one of the many, many factors that people weigh when they make economic decisions.

People are complex beings that also take utility into account (even if it’s not about subsistence), people herd with others not to gain status but also as a convenient short-cut/heuristic, they take emotions into account, they make various decisions that can be described as altruistic, they make essentially random decisions as well, etc. etc.

Describing the economy as ‘status’ economy is simplistic and misses a whole lot of other things that are often much more important than ‘status’.

Why are you insisting that ‘status’ is the only factor? It clearly is not.

RE: “my sense is that the further we move towards a society that consumes amenities rather than tangible goods the worse the problem is going to get.”

Karl, your light bulb is getting dangerously close to turning on. :)

if you substitute ‘status signals’ for ‘amenities’ then you’re on track.

As prosperity increases the only consumable that is valuable to people is status signaling. Or in your terms, the only reason for anyone to consume is to increase their consumption of status signals which in turn gives them access to better mates (because women are hypergamic), a better class of people from whom they can learn eve more and better status signals.

If you want to keep demand increasing in an advanced economy you must continue to develop status signals as products and services.

I hope that this is beginning to help you understand that solving for demand and equality are dangerous propositions, and that the only way to build a successful economy is by ensuring that the lower class population is competitive in the world economy.

**Macro always seems to have a sort of 19th century concept of an economy as one of trying to distribute the basic mass production goods, rather than a 21st concept of an economy that consists almost ENTIRELY OF STATUS SIGNALS.**

Nationalism = tribalism and small homogenous states have the most efficient status economy allowing for the greatest degree of redistribution of material wealth.

Is it that giving the poor healthcare will lower the status of the wealthy, or the competition for status among the wealthy inflates the cost of healthcare? If we were far about subsistence wouldn’t the poor already have it, or perhaps they do in some low quality form?

The concept of multi-tiered economies takes time to grow in the mind. I am so glad to see what I have wrestled with for years, online and in discussion. Signalling is one thing, actually applying knowledge between the varying dimensions altogether more important.

There’s another complimentary explanation for the price rises… convenience pricing. Walmart isn’t the best place to go on a busy Saturday afternoon to buy stuff. The lines and resultant wait times can be REALLY BAD. So bad, I will turn around and leave and go to Walgreen’s or Lowe’s or Sears, etc. to buy an item at a much higher price because I won’t have to wait in a line. Remember when Walmart had those signs telling you they would open a new check out if the line was longer than X? Those haven’t been around in a decade or more.

Almost all of the things you point out is astonishingly legitimate and it makes me ponder the reason why I had not looked at this with this light previously. This piece really did turn the light on for me as far as this specific subject goes. However at this time there is actually 1 factor I am not too comfortable with and while I make an effort to reconcile that with the main idea of the issue, allow me see what all the rest of your readers have to point out.Very well done.